Thinking about getting a car on hire purchase? As with any financial decision, it’s good to weigh up the advantages and disadvantages first so you can make the right decision for yourself.
What is hire purchase?
Hire purchase (HP) is a finance option that allows you to spread the cost of buying your car over a period of time rather than paying for it all in one go.
When you take out a hire purchase agreement, you normally agree to an upfront deposit followed by fixed monthly payments over an agreed term. When the agreement comes to an end and all the payments have been made, you may be asked to pay a one-off small final fee, after which you become the legal owner of the car.
For all intents and purposes, hire purchase is as the name suggests – you hire the car for the length of the agreement, with the option to purchase at the end or part-exchange and upgrade to a newer vehicle.
Read: What is hire purchase, and how does it work?
How does hire purchase work?
Once you’ve decided on the car you want, you’ll know how much you need to borrow. Then, an affordable deposit amount can be agreed upon. In most cases, the deposit is usually 10% or more of the car, although we offer £0 deposit options on all of our vehicles.
The balance that remains can then be paid off in fixed monthly instalments – usually over a period of 12-60 months, depending on what’s affordable for you.
The larger the deposit you put down at the start, the lower your monthly payments will be. Of course, this works the other way, too. If you make a smaller deposit upfront, your monthly repayments will be higher.
Repayments and interest
The monthly repayment amount is calculated using the value of the car when you sign the agreement, along with the interest that’s due. That’s then divided by the length of time you want the agreement to run.
Most hire purchase terms run over a period of 12-60 months (one-five years). The longer the term, the lower the monthly repayments will be.
However, if you go for a longer term, you’ll also be paying over a longer period of time, which means it’ll be longer before you own the car outright too.
Interest rates available to you will vary, but your credit score plays an essential part in which deals you’ll be eligible for.
Usually, the better your credit score, the less of a risk the lender deems you, and so the less interest you’ll pay.
The end of the agreement
At the end of the term, when all the monthly repayments have been met, many hire purchase deals carry a nominal ‘option to purchase’ fee. This is typically no more than £10 and covers the cost of transferring ownership over to you. Once that has been made, you become the legal owner of the car.
Although the term of your agreement is fixed, it does allow for a degree of flexibility. So, if your financial situation changes, you can potentially pay in full and settle the agreement earlier on, depending on your contract’s terms and conditions.
Advantages of hire purchase
1. You can access newer, higher specification cars
When paying for a car out of your own pocket, you’re usually limited in choice by the amount you can afford or want to spend. With a hire purchase agreement, it becomes possible to afford a higher spec car right away.
2. You can spread the cost over a fixed term
With a hire purchase agreement, you can spread the cost of the vehicle with monthly repayments. How long the term lasts is dependent on how much you can afford to pay back every month. There’s also flexibility in how much you’ll pay monthly, as you can pay a larger deposit amount in exchange for lower monthly payments.
3. The interest rate is fixed
The interest rate will remain fixed throughout the term. This won’t change, no matter what the Bank of England’s base rate does. So, you’ll know beforehand exactly how much the car will cost over the length of your agreement and can budget accordingly.
4. You’ll own the car at the end of the agreement
After paying the last instalment, the ownership of the vehicle will transfer from the finance company to you. At that point, you’ll legally own the car. At this point, you can carry on using the car free of any financial obligation or part-exchange it for a newer vehicle.
5. Option to pay off the loan early
Most hire purchase agreements allow you to pay off the balance early, reducing the long-term cost. Some, however, will require a minimum amount of monthly payments to be made first before they allow early repayment.
6. There are fewer restrictions
Unlike leasing a vehicle, there are no mileage or conditional restrictions that must be met with a hire purchase agreement, as the car becomes yours once the term has ended. However, you must remember that you’re not the legal owner of the car during the agreement, so there could be stipulations on modifying the car until your agreement ends.
Disadvantages of hire purchase
1. The loan is secured against the vehicle
With a hire purchase agreement, you’re in a fixed contract. As you don’t own the car until the final payment is made, if, for any reason, you can’t afford to make payments, the finance company could take your car away.
2. It will cost more overall
The interest charges on hire purchase mean the final cost of your car will be more than if you were to purchase it outright. Monthly payments with hire purchase are also generally higher than with PCP or leasing deals because you’re paying towards the full cost the vehicle.
3. Monthly payments are based on credit rating
As it’s a secured loan, hire purchase agreements are available to buyers with poor credit ratings. However, if you happen to have a poor credit rating or even no credit (for instance, if you haven’t borrowed in the past), you may not be eligible for lower interest rate deals.
4. It can be expensive for short term agreements
If you’re looking for a short-term agreement rather than one spread out over several years, choosing a hire purchase can turn out to be an expensive route.
5. Missing or late payments could affect your credit score
It’s usual for a hire purchase agreement to be registered with credit agencies. So if over the term, you miss a payment or even make a late payment, it will be flagged on your credit report and may affect your credit score or your ability to borrow in the future.
Hire purchase advantages and disadvantages at a glance
| Advantages | Disadvantages |
| Simple to apply | Higher total cost |
| Fixed interest rates | Car can be repossessed if you don’t make payments |
| Spread the cost over a number of years | Contract terms can be quite long |
| Own the car at the end of agreement | Won’t own the car until final payment is made |
Is hire purchase right for me?
There are always advantages and disadvantages to any financial decision. While hire purchase is a great finance option to get your hands on the car you want straight away, it’s not always right for everyone.
Before deciding whether a hire purchase is the right option to finance your vehicle, it’s important to weigh all the advantages and disadvantages alongside your own personal and financial circumstances to ensure you choose the best option for your needs.
Read: Car finance explained: What is it and how does it work?
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